Generally it is very settled economics that any tax introduces inefficiency into a market.
I buy apples for $1.50, sell them for $1.75.
Tax is levied on apples of $0.05 per, so the customer pays me $1.80 for an apple that I only was selling for $1.75, and I remit the $0.05 to the government. This causes fewer trades in apples to occur because there are some people who are willing to buy an apple at $1.75 but not at $1.80.
While not as simplistic, income taxes and payroll taxes do have this same effect on labor markets.
Income tax is harder to talk about because of the mass of tax credits, deductions, and such, but let’s try to use an example just as simplistic as the apple example.
I’m a laborer, I am fine selling my labor for $50,000 a year. However the tax man is going to take $7500 out, so despite my customer (employer) buying my services for $50,000 I only go home with $42500. I’m actually okay with that though, and find $42500 net to be just fine.
Let’s assume 5 other employees of the exact same situation, all fine with taking home $42500 net.
The company is thus spending $300,000 a year on those 6 employees, and those 6 employees are collectively taking home $255,000 a year. If you didn’t catch it, that means there is enough money in the difference between those two price points that if there was no income tax the employer could just pay us all $42500 and have a 7th person on payroll, and we’d all still be taking home the same amount of money.
So while not as immediately obvious as the apples example, you can see how income tax affects the labor market. (Obviously the above is just an example, it ignores things like the payroll taxes that both employers and employee pay amongst other things.)
Now, that is really just talking about payrolls and the labor market. So a high income tax rate will mean that as a company grows and needs to hire more people, it will be able to higher a fewer number of people than it otherwise would, because a high tax rate will cause the “gross pay” for a highly qualified professional like a chemical engineer to go up significantly so that that individual will still enjoy a large net income. It will mean that a chemical company despite growth in revenue and a desire to expand production will be unable to hire say, 500 chemical engineers with its budgeted money for new hires but instead will only be able to hire 350.
So directly, the high income tax can limit job growth, but will it limit growth of the overall economy? It can, because if I want to hire 500 chemical engineers for expansion and can only afford 350 because of the effects of high income tax on the labor market, I cannot expand operations as significantly as I would like, so that retards my operational growth as well as my growth in employees.
That is just the black and white of it, though. Public policy isn’t completely married to those concerns. Maybe there is a valid reason to put an inefficiency on the market, namely there are collective operations that must be paid for on a societal level and taxes are the only way to fund them. Recognizing that there is a dead weight loss to a tax isn’t the same as saying all taxes are the bad, you have to have some government and some services and if you accept that then you accept there must be taxes and that means you must be willing to retard growth to a degree.
At the same time, while this is more of a debated issue, there is some evidence to support the argument that certain tax schemes, while not escaping the fact of creating inefficiency can cause gains in other areas that might offset the inefficiency directly caused by the tax.
As a strongly pro-business Republican I can tell you that I think the impact of income taxes is less important to business growth than may be presumed. For one. while the income tax will limit the number of new people a burgeoning business can hire versus a situation with no income tax at all, the impact isn’t typically going to be as large as in my example above. What I feel is far more important is regulatory climate and creating situations in which businesses want to do business. Several of the states that have seen business booms in the last 20 years at the expense of other states are states that have created a pro-business regulatory climate. I think that is far more important than anything related to taxes.
Corporate income taxes are a totally different beast altogether, and I will say that evaluating their impact is somewhat different because most corporations will intentionally depress their taxable income by making large capital investments so on some level a corporate income tax can be good for investors and the company. Mainly because it’s generally better for a corporation to reinvest its money than it is for them to stockpile it in huge piles of cash.
Things do vary from industry to industry though. Technology companies are typically very low-intensity companies in terms of capital expenditure but are high in revenue. So while Microsoft has been made fun of for some of its costly acquisitions, it must be noted that Microsoft has always had the problem of “cash looking for a home.” They take the approach of paying out dividends and buying other companies in an attempt to diversify. Other technology companies have sometimes stockpiled large amounts of cash, and I question it when it goes too far–what value does that give the investor? So sometimes disincentivizing that sort of behavior isn’t always a bad thing.